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Stephens & Stephens XII, LLC V. Fireman’s Fund Insurance Co.

(Insurer required to pay conditional actual cash value of property under commercial property policy pending insured’s actual repair of damaged property in order to claim full replacement cost coverage.)

In Stephens & Stephens XII, LLC v. Fireman’s Fund Insurance Co., 231 Cal.App.4th 1131 (November 24, 2014), the California First District Court of Appeal vacated the trial court’s entry of judgment notwithstanding the verdict (“JNOV”) with respect to a jury award for breach of contract in the amount of $2,100,293.00 for the replacement cost of damage sustained by a commercial building, along with $2,135,936.00 in lost business income. The jury also awarded $436,896 for what it characterized as “lost rents” in response to plaintiff’s claim for breach of the implied covenant of good faith and fair dealing.

In vacating the trial court’s award, the Court of Appeal noted that commercial property policies afford alternative coverages for replacement cost (full value of the cost of repairing a building) and actual cash value (actual depreciated value of the damage to property). The Court of Appeal also noted that if an insured makes a claim for actual cash value, it may still repair the damage and claim the additional amount necessary to equal the replacement cost, so long as the insured notifies Fireman’s Fund of its intent to make a claim for additional costs within 180 days after the loss or damage.

The parties’ dispute arose out of a claim for damage related to the removal and stripping of all electrical and other conductive materials from a building owned by Stephens & Stephens XII, LLC (“Stephens XII”). The building had been stripped of all electrical and other conductive materials three days after Fireman’s Fund had issued a commercial property policy to Stephens XII. Ultimately, nearly five years after the incident (accident took place in late June 2007), in February, 2012, Fireman’s Fund denied coverage of the Stephens XII claim based on the determination that Stephens XII had concealed and misrepresented material information during the insurance investigation.

Because Fireman’s Fund refused to pay the loss, Stephens XII filed a complaint for breach of contract and bad faith. After a jury trial, a jury awarded damages in the amount of $2,100,293 for replacement cost of the building and $2,135,936 in lost business income. The jury also awarded $436,896 as lost rents in response to Stephens XII’s claim for breach of the implied covenant of good faith and fair dealing. In response to the jury’s award, the trial court entered a judgment notwithstanding the verdict based on Stephen XII’s failure to actually repair the building as required by the replacement cost coverage afforded by the Fireman’s Fund policy. The trial court noted that Stephens XII never made a claim for actual cash value under the Fireman’s Fund policy. Hence, based on Stephens XII’s failure to satisfy the condition precedent of actually repairing the building, the trial court found that Stephens XII was not entitled to coverage under the Fireman’s Fund commercial property policy.

In vacating the trial court’s JNOV, the Court of Appeal stated as follows:

The trial court properly interpreted the policy's terms, and Stephens XII does not seriously contend otherwise. Under these terms, Stephens XII could claim either actual cost value or replacement cost, but it was entitled to receive replacement cost only if it actually repaired the damage. As the court observed in granting JNOV, there was no dispute that Stephens XII did not repair the property and was ineligible to receive replacement cost under the literal terms of the policy. While the parties dispute whether the court properly interpreted the policy as requiring an affirmative claim for actual cost value reimbursement, Stephens XII disclaimed any intent to recover actual cost value at trial and presented no evidence of this measure of damages.

. . .

We recognize that “[g]enerally, a party's failure to perform a condition precedent will preclude an action for breach of contract.” (Richman v. Hartley (2014) 224 Cal.App.4th 1182, 1192 [169 Cal. Rptr. 3d 475].) But here, Stephens XII's repair of the property is not a condition precedent to Fireman's Fund's liability under the policy. Instead, Fireman's Fund's duty to reimburse Stephens XII arose as soon as a claim was filed. At that point, Fireman's Fund was liable to pay actual cost value. Repairing the damaged property was a condition precedent only for the additional obligation to pay the difference between actual cost value and replacement cost.

Fireman's Fund argues that Stephens XII failed to prove the coverage dispute hindered or prevented it from repairing the property. The jury found otherwise, and that finding was supported by substantial evidence. While there was significant evidence that Stephens XII had debated whether to repair, subdivide, or demolish the property, there was also significant evidence that Fireman's Fund's refusal to commit to coverage made it difficult for Stephens XII to know what to do with the property. Donald Stephens testified that the company had essentially exhausted its capital in maintaining the property and needed a coverage commitment from Fireman's Fund to proceed. We are satisfied that the uncertainty created by Fireman's Fund's failure to accept coverage sufficiently hindered Stephens XII's ability to repair the property to satisfy the prevention doctrine.

The judgment must accommodate an additional limitation on Stephens XII's ability to recover replacement cost. Stephens XII submitted proof of likely replacement cost and received a monetary award of those costs from the jury. The policy, however, limits Fireman's Fund's obligation to “that is necessary to repair or replace the lost or damaged property.” (Italics added.) Just as we find no basis for excusing Stephens XII's obligation to repair, we find no basis for awarding Stephens XII a specific amount of replacement cost before it makes the actual repairs. Instead, Stephens XII is entitled to a judgment declaring its right to receive reimbursement for repair costs, if and when the repairs have actually been performed in a timely manner, and in an amount equal to Stephens XII's actual expenditures for them.

In vacating the trial court’s award, the Court of Appeal rejected Stephen XII’s arguments that Fireman’s Fund had waived its right to contest coverage of the claim, and/or was estopped from contesting coverage. The Court of Appeal also rejected Stephen XII’s argument that Fireman’s Fund had not been potential prejudiced by its refusal to initiate the repair of the building. Lastly, the Court of Appeal held that Fireman’s Fund’s denial of coverage did not constitute a repudiation of the policy. Rather, it constituted an ordinary breach of contract.

In addition, the Court of Appeal held that the jury’s award of lost income appears to have corresponded with plaintiff’s expert’s testimony regarding lost rents. Hence, evidence introduced at trial was sufficient to support an award of lost rents based on the sufficiency of evidence introduced at trial.

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